Online shopping site and marketplace ShopClues recently revealed it has raised about Rs.50 crore (approx $7.8 million) in venture debt from InnoVen Capital. ShopClues has been called a unicorn company as it is worth over $1.1 billion and is a private startup. It is considered rare for a private start-up such as this to opt for venture debt.
This fresh capital infusion from InnoVen into ShopClues comes over 15 months after the startup raised $100-140 million in January 2016 to enter the ‘unicorn league’. Back then, the money came from three primary investors, Singapore’s sovereign wealth fund GIC Pvt. Ltd., and two existing investors — Tiger Global Management and Nexus Venture Partners.
Start-ups usually raise debt when they are short of cash, working capital, and to fund acquisitions. ShopClues, being no exception to this, started raising debt mainly for its day to day business activities.
The Chief Executive of ShopClues Sanjay Sethi in a statement to Mint said,
A company which is getting close to profitability has the option to raise either equity money or debt. Equity will lead to dilution, but you can pay off debt through your balance sheet. Debt is a good instrument to meet working capital requirement or any gaps to plug to achieve profitability. We are profitable on a contribution margin level, but need to achieve a scale where we can cover our fixed costs. Our burn is reducing consistently. Hence, debt comes into play so that we can scale rapidly and reach profitability.
If you’re a little confused with that jargon, contribution margin is calculated by subtracting the variable costs from the selling price to ascertain whether the companies can meet the variable cost with revenue.
Research firm Tofler found that ShopClues has generated revenues worth Rs. 179 crore for the financial year that ended on 31st March 2016 but its losses were burgeoning and have reached Rs. 383 crore. In spite of massive losses, it was discovered that the company’s burn rate is substantially lower than that of its bigger competitors, Flipkart, Amazon, and Paytm.
RedSeer Management Consulting Pvt. Ltd. has found that India’s e-commerce market seems to have started stagnating, with only $14.5 billion in 2016 compared with $13 billion the year before. This stagnation has resulted in analysts questioning the viability of ShopClues in such a market.
This doubt has especially arisen because analysts had earlier predicted that e-commerce sales in India would reach $48-100 billion by the year 2020 but this now seems like a distant aspiration. The growth rate of the market is much lower than estimated and this will prove to be a hurdle for startups like ShopClues.
Snapdeal’s possible merger with Flipkart has raised the speculation that Tiger Global, a common investor for both Flipkart and ShopClues may arrange a merger between the two. The primary reason for a few investors backing ShopClues is that it is different from Amazon and Flipkart in the way it focuses on unstructured categories online and its targeting of a different consumer base from its competitors.
An anonymous executive of a venture capital firm commented on this difference between ShopClues and its rivals stating,
A few things stand out for ShopClues. Their customers are not the ones frequently buying on Flipkart and Amazon. There is a huge market beyond the metros and ShopClues is going after them. Also, the management has been prudent on how they use the cash. They haven’t raised anywhere close to the capital some of the larger companies have used and consumed to get where they are today. It doesn’t need hundreds of millions of dollars.
Every IPO has two aspects, the first is when the business is ready, and the second is when the market is ready. For ShopClues, the former is true and the management is focusing on this by cutting down its costs. The readiness of the market to accept this company will have to be seen only with the passage of time.